Key Takeaways from the AWC Budget and Finance Management Workshop
Each year, for more years than I can remember now, the Association of Washington Cities (AWC) hosts a workshop on budgeting and financial management. The workshop itself has evolved over the years but has always been in Leavenworth (with another session on the “west-side” in local election years) and it has always been a good time of reflection on key fiscal management issues. This past August was no exception. While there were a few key ideas that seemed to resonate with the more than 100 in attendance, two stood out to me.
One key idea was the essential function of sound and timely cash reconciliations. Most local governments in Washington State are “cash basis” (as contrasted to GAAP basis). If a cash transaction occurs, it results in the related accounting entry. In any event, keeping very close track of cash activity can help a local government identify any concerns or issues early on. Reconciling the bank statements to assure your accounting records agree with the cash activity is one of the best things any government can do towards strong internal controls and good fiscal management.
Long-Term Financial Planning
Another key idea that was on the minds of those who attended the workshops was longer-term financial planning. We always ask if there are questions or topics that participants came to the workshop in hopes of learning more about. “Where to find more resources” is one common response – which always brings a chuckle. However, several expressed an interest in learning about how to do a better job of longer-term financial planning. Fortunately, we had seen this interest in our planning for the workshop as well and included a session specifically on that topic. In this article, we’ll explore this issue further as well.
Many of us have developed multi-year financial plans for our capital expenditures – those planning under the Growth Management Act here in Washington have been doing 6-year “Capital Facilities Plans” for several years now. More recently the interest in longer term financial planning has expanded to the operating budget as well. In the Government Finance Officer Association (GFOA) peer review program for budgets – multi-year forecasting for operations was the most recent addition to the criteria checklist. It has been a best practice of the GFOA since 2008. However, the practice is still gaining ground as a part of our budget planning – not only here in Washington, but around the country.
Multi-year financial planning typically occurs in the larger operating funds, such as the General (or Current Expense) fund, large utility funds and potentially large special revenue funds (such as transportation or streets). It isn’t practical (or necessary) to create multi-year financial plans for all funds of your organization. If you are just getting started, then choose that fund which would benefit most from planning ahead. This is often the General Fund. However, a strong case can be made that multi-year planning and rate-setting in the enterprise funds would serve your community very well.
One of the key points made during the workshops was to avoid overcomplicating this effort. We often incorrectly associate complexity with accuracy or sophistication. That can lead to “missing the forest for the trees,” which actually reduces the usability of the end product rather than enhancing it. I’ll show a brief example below to help make this point. Ways to stay simple include: summarizing the numbers to “thousands” (and don’t worry about the rounding!); using larger account categories (summarize the smaller line-items in your current budgets); forecasting out three years initially.
Some suggest that the longer out a forecast goes, the better it must be. I’d offer an alternative view. Forecasting becomes less effective the further into the future you are predicting. So, I’d start with three years and consider expanding your forecast to potentially six years. What might happen beyond that would be very difficult to anticipate – and undermine any value in attempting to forecast. (However, an exception to this could be if you were planning for a major change, such as a new treatment plant or something on a similar scale that would disrupt your current operating budgets).
The Secret Sauce
What I often refer to as “the secret sauce” of long-term forecasting is to enable your forecast to be easily adjusted by changing assumptions. For example, the authority to increase property tax revenues from the current tax base by 1% each year is often the subject of some discussion. Include a toggle in your forecast so that you can easily see the effect of either including this increase or excluding the increase. Set up your spreadsheets so that you can readily evaluate the effects of different changes to compensation – as another example. Again, you’ll see this in the examples below. If you’ve kept your model simple, adding these “drivers” so that they can influence the end result of your forecasts will turn this into a powerful tool for your organization.
Lastly, convert the data into a picture (a graph) that will illustrate the results from the forecasting assumptions. Many times the audience for this work is not as comfortable with spreadsheets, or interpreting lots of numbers as they are with understanding a graph. The benefit of long-term forecasting is to facilitate conversations among leaders with regard to options and alternatives. This can best be accomplished with high-level summaries and graphs that illustrate the differences between one strategy or another. Keep this in mind when developing your forecasts.
In the financial forecast graph below, we illustrate the past three years of trend (shaded in blue), the current budget and five years of forecast (shaded in green). We also include the effect on the ending fund balance in each year (dashed line). We use a “secondary index” on the right for the fund balance.
Long Range Planning Worksheets
In the below worksheets we’ve summarized to thousands, included three years of history along with the current budget and five years of forecast. We’ve combined the smaller revenue categories into “other revenues”.
Below, the assumptions are shaded in green and the results are shaded in yellow (we only want to change the values in the green cells). In some cases we have multiple assumptions – such as property tax.
For expenditures, benefits are a function of salaries, so we’ve kept that relationship constant (we could also change it if we preferred). We’ve made the number of new employees one of the assumptions and only distinguished the salary differences where it might be of significance. We used CPI drivers for smaller categories.
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